Property 101: Growth vs. Yield
Growth vs. Yield
When you invest in property there are really only two things you’re looking for. Capital gains and rental income – preferably as much as possible.
As investors, we measure capital gains in terms of ‘growth’. Rent is measured in terms of ‘yield’. So when you hear about growth, think about your property increasing in value. When you hear yield, think of tenants paying you rent.
It’s generally accepted that when you are choosing a property, higher growth will come at a cost of lower yield and vice versa. They’re both on the same spectrum though, so it’s not like you get one and not the other. It’s just a question of scale.
It happens that way because it’s land that gives you growth and buildings which give you a yield. Land goes up in value, but people aren’t lining up to rent a bare piece of land. Meanwhile, buildings actually depreciate, but that’s what your tenant is going to be paying you for.
So when you’re out shopping for a property, whatever your budget, some of your money goes to land, and the rest into the building. Your land budget will always come at a cost to your building, so your growth will always come at a cost to your yield.
The growth rate is a measure of how fast your property increases in value each year. In the main centres you can expect 5% growth per annum. Some years it’s more, some years it’s less, but that’s a conservative average based on historical trends.
Technically, yield is a measure of your annual rental return against the amount you paid for your property. There’s Gross yield and Net yield.
Gross yield is simply comparing rent to purchase price whereas Net yield factors in costs as well.
Varying Growth & Yield
The level of yield and growth you get from your property investment – though forecasting is always speculative to a degree – is your decision to make based on what you buy and where.
Decide how much weekly cash income you’re prepared to forego in the pursuit of capital gains, then choose accordingly.
We categorize property into four types – apartments, townhouses, houses and land – written in this order which illustrates the size of the land each type has, relative to the size of the dwelling. The more land, the more growth you can expect, but lower yield.
The other way to vary your position on the scale of yield and growth, given the same property type, is to shift from an expensive neighbourhood to a cheaper one.
For example, if you are set on wanting a townhouse, but aren’t satisfied with the yield of the property, you can increase the yield by finding a similar townhouse in a cheaper neighbourhood. Because the purchase price is likely to be less, but rental income would be similar, your yield will increase. Normal rules apply though – expect less growth.
Most of our clients aren’t looking for an extra few bucks each week but they do want to know they’ll be comfortable in retirement. On the other hand, they don’t have much spare cash week to week. For them, we suggest buying somewhere in the middle. A dwelling that will earn enough rent to cover most or all of their expenses, on a small freehold section, in a decent neighbourhood.
Here is an example of what your forecast might look like comparing an apartment with a house:
Growth and yield – They’re both important.
Growth is in land. Yield is from dwellings.
You can have a bit of both, but not all of both.
Keen to get started? Learn more at our next property investment event.
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